Tuesday, June 10, 2008

The Beauty of Markets: Energy and Julian Simon

Wednesday's editorial in the Wall Street Journal by Holman Jenkins, Jr., entitled "The Coming Oil Investment Boom," largely sums up my own thoughts on the current situation involving oil supply, demand and price.

Congress is engaged in folly, as it both tried, and failed to pass a massive piece of pork masquerading as an energy bill, decries the result of functioning world oil markets, demands more supply from others, yet won't fully exploit America's own energy supplies.

But, as Jenkins writes, the real world is reacting correctly to the oil situation,

"With a couple billion Chinese, Indians and others joining the global marketplace, they will need energy, and lots of it. The price mechanism is our only hope.

Sure enough, it's working. Money is pouring into Canada's massive tar sands. A thousand substitutions are taking place on the demand side. Sales of SUVs are falling; sales of four-cylinder sedans are up. The number of miles driven by American motorists shrank in February for the first time in 26 years.

At $70 a barrel, we worried only that the folly of India and China in artificially holding down prices to consumers would spread. The news is happy here too. Taiwan, Indonesia and Malaysia are cutting back subsidies or thinking about it. India and China may not let prices float anytime soon, but they're letting gas lines and spot shortages ration supply anyway."

Yes, already consumers and markets are adjusting supply and demand via price, while onlooking producers and investors are also behaving rationally. New substitutes for conventional, oil-based hydrocarbon energy are being developed without any government mandating them.

Jenkins continues by opining on whether the current price of oil is largely a function of speculation,

"If today's towering price of oil reflects some speculator's bet on a long-term scarcity of liquid motor fuels, this will prove the misguided bet of a lifetime. Hydrocarbons are abundant and can be extracted from living plant matter as well as from their fossil remains. Many oil fields under current technology are considered depleted when they're still 50% full. But technology advances, doesn't it?

Yet there's one miracle of adaptation that even $135 oil apparently can't vouchsafe. It can't bring intellectual coherence to American rhetoric or policy on energy.

By one count, America sits on enough oil and gas to meet its own needs for half a century. We won't help ourselves although our environmental delicacy somehow doesn't stop us from screaming at other countries to tear up their own pristine wildernesses to supply us with cheap energy. President Bush rushes to the Saudis, supplicating for more oil. Congress threatens OPEC with antitrust action. Go figure. That U.S. politicians can afford to indulge a persistent unreality about a basic input of industrial civilization only testifies to how responsive and resilient the global energy market has been despite the political silliness it meets at every turn."

This passage really hits home. Just this morning, on CNBC, the Democratic governor of Kansas spent several minutes speaking carefully out of both sides of her mouth. When asked directly by the program's guest host, a Bush administration economic official, whether she supported exploiting US energy resources currently off-limits due to Congressional legislation, the governor managed to say everything and nothing. She's for conservation and lower energy prices, preservation of American wilderness for future generations and energy production.

Nowhere did she acknowledge how silly American politicians look as they behave as described by Jenkins- demanding the despoiling, if that's what it is, of other countries' environments to supply the world with more, less expensive oil.

As I wrote here in November, Julian Simon would be nonplussed about the situation. Without the signals of higher oil prices, how will markets and consumers ever know to behave in ways which allow market forces to bring about solutions?

As Jenkins writes,

"But the biggest fools today may be those greenies who are clapping their hands over $135 oil as if this somehow represents the beginning of the end of fossil fuels. High prices are not the equivalent of carbon taxes – they will have the opposite effect in the long run, spurring investment and technological progress to bring vast new resources of fossil energy into production. For instance, turning coal, oil sands and oil shale into motor fuels, which is cost-effective at half of today's oil price, means massive additional releases of CO2. It's the worst nightmare of the climate worrywarts."

Yes, indeed. Because if you think that the US Congress or any other governmental body on the planet knows more about which energy sources, at what prices, should be developed to replace oil, you deserve the ham-handed governmental solution you're going to get from that.

In summary, Jenkins contends that the global warming crowd needs to 'grow up',

"Growing up would begin with recognizing that science doesn't prove the case against CO2. Our political system has been looking at the problem of climate change for a generation, and lack of action is not due to the machinations of big oil – but to the inability of policy to bridge a giant chasm between proposed costs and benefits. Even if carbon's guilt is assumed, the economics are far from certain that it wouldn't be cheaper just to endure a changing climate.

Growing up would also mean realizing that climate activists are in danger of losing all political credibility as they become handmaidens to corrupt pork bonanzas for the corn ethanol lobby and Silicon Valley alternative energy impresarios. Look no further than the climate bill being debated on Capitol Hill this week. The only real question it poses is how much Congress will spend on climate pork while having no discernible impact on climate.

Finally, growing up means recognizing that their one politically and morally saleable proposition is to offer carbon taxes as a de facto consumption tax, with the proceeds used to offset labor and capital taxes that discourage work and investment. This would be a case of taxing "bads" not "goods," with benefits for growth and the average voter's bottom line independent of any problematic evidence about CO2 and climate.

Voters and their representatives then could at least contemplate supporting a climate policy on cost-benefit grounds, rather than on the religious posturing that Al Gore and others adopt to push what they can't sell rationally. Will the greens learn these lessons? Not likely – which is why $135 oil may prove the beginning of the end of any political movement to do anything about climate change."

That last sentiment is really insightful. How many times do politicians mandate what won't sell on the free market? When you hear "mandate" from a legislator, look out. Someone's lobbyist hit pay dirt and you're going to pay.

In this case, as Jenkins notes, what Al Gore and company can't present as a salable proposition in the free markets, they hope to connive and manipulate the US Congress to mandate instead.

That energy/climate change bill mercifully failed already. In the meantime, people we don't even know, and some who we do, are busily engaged in innovation to supplant $135/barrel oil with new energy solutions for America and the world.

If we're lucky, oil prices will remain relatively high long enough to see these new technologies come to market and result in the world moving again to a lower long-run energy cost curve.

No comments: